The impact of the Megaupload shutdown

A new study on the impact of the Megaupload seizure has found that digital movie purchases and rentals increased significantly in the months after the site went offline. The findings are sure to stir controversy, but the research is important. The study, conducted by Brett Danaher and Michael D. Smith, is one of the first to specifically examine whether changing the availability of pirated content has an impact on legitimate sales. It also attempts to quantify the economic benefit of closing pirate sites (if any) against the real cost of doing so.

If you’re used to uneducated tirades from the MPAA and similar trade bodies, the study’s intelligence may surprise you. The authors mention many of the arguments for and against piracy, including the broad availability of content from multiple sources, the (alleged) lost sale fallacy, and the question of whether the cost of shuttering sites like Megaupload is ever justified by the increase in revenues.

The study found that “after the shutdown, countries with higher pre-shutdown usage of Megaupload experience larger increases in digital sales and rentals than countries with lower pre-shutdown usage do. The difference is both statistically and economically significant.”

The difference also exists after controlling for release schedules, shifts in consumer spending, holiday sales, and seasonal trends. Unlike other papers, which have principally focused on the impact of piracy on physical media sales, Danaher and Smith focus on digital download revenue.

Megaupload’s penetration level had little effect on sales before Christmas. At Christmas, it appears that countries with higher Megaupload usage rates also saw fewer holiday digital sales. After the shutdown, there’s a positive shift overall.

The 26-page paper breaks down how the authors modelled the impact of Megaupload’s shutdown in great detail. Two unnamed studios provided the author with sales information for 12 separate countries for the September 2011 to May 2012 period. After crunching the numbers, the study finds that the Megaupload shutdown resulted in a 7 to 10 per cent increase in digital movie sales and a 4 to 7 per cent increase in movie rentals.

The size of the increase broken down by country is directly related to the degree of Megaupload use in that country. The relative increase in Spanish revenues – where Megaupload and MegaVideo were visited by 17 per cent of the country’s Internet-using population – was much higher than in the United States, where just 2 per cent of users regularly visited Megaupload.

Ars Technica spoke with Danaher, who confirmed that for knowledgeable people, closing a site like Megaupload is nothing more than a temporary inconvenience. For the vast majority, however, such a shutdown can meaningfully impact piracy – at least for a while.

Personally, I’ve never bought the idea that everyone who pirated would refuse to buy a product legally, any more than I believed the MPAA’s argument that every pirated copy represented a lost sale at full download price. The relatively modest gains that the author’s claim actually sound reasonable. One of the more interesting questions raised by this data, however, is whether the availability of legal services directly impact piracy rates.

In the US, where there are multiple competing legal ways to acquire TV and movie content, a far smaller percentage of users accessed Megaupload than in a country like Spain, or in other EU nations where certain content isn’t available at all. One of the things this study suggests, in fact, is that paid services can compete with piracy.

What the data does (and doesn’t) say

The point of a study like this is to quantify how behaviour changed in the wake of a major website shutdown. There are plenty of people who will immediately bristle at the idea that piracy could ever cause economic damage to anything. The authors must be paid shills of the music industry. Clearly that’s the only explanation.

Reality is more complex. This is one of the first studies to track digital sales rather than focus on physical media. It’s entirely possible that digital sales are affected by piracy, while physical sales aren’t. The availability and popularity of legal alternatives is an important mitigating factor. The authors also say that while Megaupload was the only site to go down, other file locker websites changed their policies and tightened restrictions at the same time – which may have created a larger dip in content availability than Megaupload alone can account for.

The other fact to keep in mind is that this study isn’t a moral judgment. The case against Megaupload has only grown weaker in the 14 months since the original raid. The US government has fought tooth and nail to duck responsibility for seizing the property of non-infringing users, and the New Zealand government continues to refuse to extradite Kim Dotcom (and has ruled that he can sue the government for illegally spying on him).

The fact that a study has found a relationship between digital sales and the availability of pirated copies shouldn’t be read as a justification for taking Megaupload offline. We need better visibility on the profit/loss situation here, and as with any complex system, it’s likely that the availability of digital downloads (from legal and illegal sources) has had positive and negative effects on the content ecosystem.